Value Chain Management in AgribusinessZAB108 - WEEK 1

What is a Value Chain?

Value Chain Management in Agribusiness. The first thing we need to do is understand what a value chain is. The best way to describe this is to start with something that you will hopefully know and understand – a supply chain.

What is a Supply Chain?

A supply chain can be defined as “a sequence of processes in linked businesses that transform raw materials into products, services and information that consumer’s value, and will pay for”. It is driven or pushed by the producer. The businesses in the chain respond both negatively and positively to the supplier of goods. There is a deep water port in Yangshan Island, Shanghai, China. Over the next 20 years the total cost of the port expansion may reach US$12 billion. When complete, the port will have 30 shipping berths capable of handling 15 million TEU’s per year. What’s a TEU? I didn’t know either – it’s a twenty foot equivalent unit – in other words a 6 metre long shipping container. This is all to increase the capacity of the port to cater for an increased supply of goods.

We are all in a supply chain. Take for example a food supply chain. Every one of us fits into this picture somewhere. The farmer is supplied with seed, fertiliser, land, equipment etc, to then supply a product to a processing facility. In turn this processing facility supplies the product to a distribution network or centre. In this case a supermarket. We, then the consumer are supplied with the final product.

Everyone is in a Supply Chain

But does everyone in the chain collaborate to create and deliver value to the consumer?

Of course all this supply comes at a cost at each link in the chain. Just as an example, let’s look at potatoes. The majority of potatoes (about 70%) grown in Tasmania are processed for the fast food business. To give you some perspective, the average yield for potatoes is about 65 tonnes per hectare. Cost of production is about $15,000 per hectare or about $230 /tonne. The farmer receives $300 / tonne, so minus costs the farmer ends up with about $70 / tonne. At the consumer end a large packet of French fries is sold at about $2.00. This is for about 200 g of potatoes. This equates to the consumer paying about $10,000 / tonne for the final product. Does this seem fair?

The farmer gets $70, while the retailer charges $10,000. Well, until we find out who gets what in this supply chain, what costs are incurred by the retailer, processor, transporter etc – it does look a bit lopsided. Refer to this link about Jarrod and Susan Nichols from Scottsdale.

Let’s now compare this processed price to the price Tasmanian consumers pay for fresh market potatoes. The following link shows that consumers paid about $2.50 per kg for fresh potatoes in 2012/13. The price hasn’t increased too much since then. This still means that the customer (that’s you and I) pays about $2,500 per tonne – with the farmer still only receiving about $70 per tonne.

This perceived disparity between the cost of raw product to the price paid by the final consumer, has led to an increase of so-called farmer’s markets. However, farmers at these markets are generally not the large scale farmers but the niche small holder farmers and market gardeners. The question remains about the distribution of the money in the chain? We’ll come back to that - let’s continue our discussion about supply chains in general.

In a supply chain, producers are also consumers. This means that each consumer is a price taker. There is always the option of shopping around for the lowest price to increase your profit or to obtain a bargain at the supermarket (might save enough for a coffee?) – but in a supply chain each consumer that is shopping around and bargain hunting is disconnected and acts independently from other consumers or stakeholders in the chain.

So, a traditional supply chain is focused on securing customers and driving supply. Supply chains will continue to exist in business regardless of whether they are managed or not. The strength of the chain relies on efficiency and reliable logistical management. You might like to refer back to your notes on the milk price tumble from ZAB101 as to what can happen in a supply driven chain.

But change is in the air...

The business environment is becoming more dynamic and complex, leaving organisations and individuals increasingly vulnerable. In order to achieve a competitive advantage, individual actors in the supply chain:

Can allocate and utilise resources to make it hard for others to contest and even harder to replicate - for example, smart phone suppliers.

They can add more value - in other words increase effectiveness of the product. Like the new fridge – but wait, it not only keeps your drinks cold, it provides you ice as well

They can supply at a lower cost, which is increased efficiency – but where does this stop. Chasing a lower price is often a race to the bottom.

They can supply faster than the competition. This is the responsiveness of the business to timing, market changes etc. For example, transport company’s might tout the slogan ‘guaranteed next day delivery’

And lastly, stakeholders can supply product that demonstrates environmental, economic and social responsibility. For example ‘Fair Trade’.

I’d like you to take a few moments now to find one example of each of the above and describe the example in your Wordpress ePortfolio. If you haven’t done so already, start a new page for this unit.

Supply Chain Paradigm

In a supply chain paradigm, powerful actors emerge. The supermarkets are an obvious target. What do supermarkets want? Well, the basic requirements of supermarkets are:

1. Reduced complexity of supply arrangements – instead of dealing with 500 smallholders who may or may not turn up tomorrow with produce, they would prefer to deal with 5-10 larger, more stable suppliers who are reliable.

2. Reduced supply risk which involves:

Reducing volume and price variation;

Reducing opportunism;

Reducing conflict;

Increasing capability to cope with QA and safety compliance schemes.

3. Reduced price because price is a major decision factor for shoppers and increasing margin to improve profit for shareholders/owners.

As consumers, we are warned about unscrupulous behaviour by product suppliers through advocacy groups such as ‘Choice’.

This is very good for raising awareness and making people ‘accountable’, but how does it really impact on supply chains?

Well, as a matter of fact, the consumer is becoming the major driver of this change in thinking about supply chains. Other drivers include:

globalisation (Toto, I’ve a feeling we’re not in Kansas anymore)

technology - I’ve still got the hammer I was given for my 21st birthday (a good hammer will last a lifetime – and yes it has the same head and the same handle), whilst I have had over 12 computers since I bought my first computer in 1992 – each one was the best you could buy at the time

policies – with every new government comes a policy decision and how things can be improved

innovation – there is always another way

When I say consumer, I don’t just mean the final consumer of a product. Remember that consumers exist all the way up and down the chain.

How has Supply Chain Management been described?

“The process of planning, implementing and controlling the efficient, cost-effective flow and storage of raw materials, in-process inventory, finished goods and related information from point-of-origin to point of final consumption for the purpose of conforming to customer requirements (Council of Logistics Management, 1986)”

And..

“The integration of key business processes from end user through original suppliers that provides products, services and information that add value to the customers and other stakeholders (Lambert & Cooper 2000, p. 66).”

You will notice in both these statements that consumer is mentioned. Hold that thought…

Value Chains

So, I think you have got the message about supply chains. Let’s now turn our attention to value chains – what is a value chain? Well, a value chain can best be described by what it does and not necessarily what it is. In other words the impact. A value chain occurs when chain partners decide to collaboratively innovate to create and deliver value for which their customers and consumers will pay a premium price.

A successful value chain involves collaborative innovation between companies in a chain….in the inter-company spaces. It is also based on thorough understanding of specific consumer value attributes and segments. Here it is again – the consumer – not the producer. The value chain paradigm is consumer focussed, relies on co-innovation, value creation and effectiveness – consumer pull.

A value chain is a chain whose systems and behaviours are focused on delivering value to its customers and, most importantly, to the end consumer.

So the main difference between a supply chain and a value chain is the word value. Supply chain is a product supply push, whilst a value chain is consumer demand pull.

So… why study value chain management?

Value Chain Management (VCM) involves a deliberate decision by chain members to work together to improve their competitiveness by delivering superior value to each other and to the end consumer.

It works by focusing on creating and sharing value through five key principles:

Knowing what consumers and customers want

Getting the product ‘right’

Ensuring effective logistics and distribution

Putting in place an information and communication system

Building and sustaining effective relationships

The value is not all about price. Young mothers may consider food safety a big issue, empty nesters buy on like and want, whilst others in the community buy on health benefits.

In a study of 234 consumers, price was actually placed last with regard to value, whilst taste, quality and texture were the top three.

Remember....

Consumers create the value (money) that is shared up the chain…..so that value chains create and deliver value to consumers.

So... Where does the extra money come from?

Remember back to the story from Scottsdale. The local farmers wanted a price rise to make it more viable.

In other words, they wanted a bigger share of the pie. However, regardless of the price difference between a french fry and a raw potato, when someone wants more out of the same pile of cash, someone gets less. That’s a pretty hard sell. It’s an easier sell to say there is more money. So, finding value in Value chains is actually growing the pie.

Growing the pie is called Value Creation, whereby there are two groups of strategies. Those that reduce costs through greater efficiency and effectiveness, and those that increase income by delivering to more consumers, more sales per consumers and a higher price. Consumers will pay a higher price – if they perceive the value to be higher.

Sometimes we think that this all occurs in the developed economies of the world like the US, Europe and Australia, but ….

“…you will read about business terms such as ‘strategy’, ‘innovation’ and ‘culture management’. Your first reaction might be that these things don’t apply to poor, traditional smallholders; however, a young Cambodian farmer with just 160 square metres of land to support his extended family recently told visiting Australian researchers, ‘Just tell me how I can produce more from my land so that I can make enough money to buy more land’. Now that’s a strategy! Similarly, in Mt Hagen, a large town in the Papua New Guinea (PNG) Highlands region that can grow excellent cool-temperate vegetables, there are several examples of farmers’ wives who previously had only collected vegetables from relatives in their tribal villages but saw an opportunity to supply the produce to Port Moresby, the national capital. They quickly grew their collecting activities into regional wholesaling businesses, renting facilities, employing people, packing produce into special boxes and using freight aircraft to fly high-value produce one hour to Port Moresby. Each of these women also had a vision and strategy of how they could further develop their businesses.” - Taken from Collins, Dent and Bonney (2015) pp 5.

Then there’s the case of how the money is distributed and the proportion of each actor in the chain. How much ‘skin’ they have in the game will drive or not the motivation to innovate. In this example, the retailer gets 40% of the total cost of the box of fruit, whilst the producer receives 27.5%.

By going organic the producer increased the pie and their subsequent margin, without taking from the other stakeholders in the chain.

Value can be created through diversifying the supply. Please excuse the UK prices. If you walk into any supermarket in Tasmania, you will see a similar range. When next you go food shopping, have a look at the soft drink aisle and compare the ‘bulk’ 2 litre bottle cost with a 125 ml bottle. Same product but different packaging for different demand.

So, just recapping…

A supply chain is a chain linking the supplier to the consumer but pushed by the supplier – decisions of stakeholders are made independently of others in the chain.

A value chain, however, is a collaborative chain that functions on consumer demand pull – collaboration is the key, where decisions are made in consultation with others in the chain.

Why study Value Chain Management?

To learn how to create value along the chain

To learn how to grow the pie

To create consumer value

References and Further Reading

Bonney, L., Castles, A., Eversole, R., Miles, M. and Woods, M., 2015. Accounting for agriculture in place-based frameworks for regional development: A value assessment and development framework, and toolbox for building constructed advantage in agriculture based regions. Publication No. 15/002. Project No. PRJ-008839. Rural Industries Research and Development Corporation.

Collins R.C., Dent B. and Bonney L.B., 2015. A guide to value-chain analysis and development for Overseas Development Assistance projects. ACIAR Monograph No. 178. Australian Centre for International Agricultural Research: Canberra, ACT.

Acknowledgements

We wish to thank and acknowledge Dr Rajendra Adhikari and Associate Professor Laurie Bonney, Tasmanian Institute of Agriculture, University of Tasmania, for their assistance and provision of graphics for this presentation.